Brazil Pessimism Melts as Rousseff Support Drops in Polls

Under Brazilian President Dilma Rousseff, Latin America’s biggest economy has expanded at the slowest pace since President Fernando Collor stepped down in 1992. Photographer: Evaristo Sa/AFP via Getty Images

Aug. 4 (Bloomberg) -- As Brazilian President Dilma Rousseff
declines in voter polls, economists get less pessimistic on the
outlook for the nation’s currency.

Over the course of July, the median year-end forecast for
the real rose to 2.35 per dollar from 2.40, according to data
compiled by Bloomberg. While that would still represent a drop
from 2.2577 last week, the improved sentiment coincided with
polls showing Rousseff’s lead narrowing before the October
election as inflation quickens and economic growth slows.

Under Rousseff, Latin America’s biggest economy has
expanded at the slowest pace since President Fernando Collor
stepped down in 1992. Nomura Holdings Inc. estimates a 70
percent chance of an opposition victory, up from 60 percent on
June 11, and Bank of America Corp. sees the real extending gains
should the administration change.

“If the market assigns a higher likelihood of Dilma
losing, that’s good for the real,” Ezequiel Aguirre, a
strategist at Bank of America in New York, said by phone.

The real has rallied 4.6 percent this year, leading gains
among the 16 most-traded currencies tracked by Bloomberg, as the
central bank intervened in the foreign-exchange market to
bolster the exchange rate.

The gains contrast with data showing an economic slump,
including a report Aug. 1 that Brazil’s industrial production
dropped for the fourth straight month in June, falling 1.4
percent. Revisions showed it contracted 0.8 percent in May, more
than originally reported.

Family Consumption

Gross domestic product expanded 0.2 percent in the first
quarter, half the pace of the prior three months as family
consumption contracted.

Rousseff’s lead over candidate Aecio Neves in a possible
second round of October’s presidential election dropped to eight
percentage points on July 22 from 13 percentage points in June,
according to Ibope polls published by O Estado de Sao Paulo
newspaper. The most recent survey of 2,002 people had a margin
of error of plus or minus 2 percentage points. A Sensus poll
released July 18 showed the candidates tied in a runoff vote.

“The story has been changing,” Benoit Anne, the head of
emerging-market strategy at Societe Generale SA in London, said
by phone. “The election is a closer call and that’s introducing
a different variable that we hadn’t anticipated.”

A press officer at Rousseff’s campaign headquarters
declined to comment on forecasts showing economists less
pessimistic about the real after recent voter polls.

The real fell less than 0.1 percent to 2.2584 per dollar
today.

Changing Estimates

Last month’s increase in real forecasts to 2.35 per dollar
followed no change in June. At one point in March, economists
foresaw the currency weakening to 2.5, according to data
compiled by Bloomberg. Now, the median year-end prediction has
fallen back to 2.4.

As growth has decelerated, the central bank has tried to
keep the real from weakening and further stoking inflation by
selling foreign-exchange swaps. Annual inflation, which hasn’t
slowed to the 4.5 percent center of the central bank’s target
range since Rousseff took office in January 2011, accelerated to
6.51 percent in mid-July.

Brazil’s international reserves and the central bank’s
currency intervention have been successful in protecting the
real, Rousseff said in a July 30 speech at an event hosted by
the National Industry Confederation. In June, the bank extended
its swap program through at least December.

Neves said in the same industry event that a weaker
currency seems essential to help boost domestic output.

“It’s yet to be seen if direct intervention in the real
would continue with a new administration,” Alejandro Cuadrado,
the chief Latin America currency strategist at Banco Bilbao
Vizcaya Argentaria SA in New York, said by phone.

IMF Report

The International Monetary Fund said policy makers
shouldn’t shore up the real as the economy stalls and inflation
accelerates. Currency intervention is useful for calming sudden
shifts in capital flows, “but should not be used to resist
currency pressures that reflect changes in fundamentals,” IMF
economists wrote in a research report published July 29.

The real has depreciated since Rousseff took office, from
as strong as 1.5290 in July 2011 to as weak as 2.4549 in August
2013. The 2011 level was its strongest since 1999 and
contributed to a slowdown in growth as exports became less
competitive.

GDP will expand 1.3 percent this year, according to the
median estimate of almost 40 economists surveyed by Bloomberg.
That compares with 2.49 percent for the global economy.

If the opposition wins the election, the real will
strengthen initially, Citigroup Inc. strategists wrote in a July
30 note to clients.

“It would boost business confidence and expectations of
improved fundamentals and fiscal stance and would justify a
stronger currency,” they said.

Credit Rating

Standard & Poor’s cut Brazil’s sovereign credit rating one
step in March to BBB-, the lowest level of investment grade,
citing sluggish growth and expansionary fiscal policies. Brazil
has posted a primary budget deficit for two straight months as
policy makers struggled to fortify fiscal accounts during an
economic slowdown.

The real has the potential to rally to 2.2 per dollar if
Rousseff is voted out of office, according to Christian
Lawrence, a currency strategist at Rabobank.

“Our base case is that Neves wins and that we see capital
inflows into Brazil from international markets,” Lawrence said
in a phone interview from New York. “We don’t expect inflows if
Dilma Rousseff wins.”